RR Phantom
Location : Wasted Space
Job/hobbies : Cayman Islands Actuary
 |  Subject: New sharemarket in OZschwitz to compete with the ASX  Thu Apr 01, 2010 1:51 am | |
| NEWS that the federal government has granted in-principle approval for the Nomura-controlled Chi-X to establish a sharemarket in Australia in competition with the ASX throws up twin challenges.
First, it exposes the listed incumbent to share price pressure as investors re-rate it to take into account lower pricing power, and lower market share.
Share price premiums accorded the London Stock Exchange (LSE) and the Toronto exchange when they were monopolies have become discounts since new entrants took market share by discounting fees.
In London, Chi-X has built a 28 per cent market share in three years and the LSE's trading market share has fallen from 100 per cent to about 43 per cent. The Toronto exchange lost its monopoly early in 2008 and Chi-X and other entrants have taken about a third of the market.
The decision also sets a task for the market and companies regulator, the Australian Securities and Investments Commission, to produce a new template for market regulation.
ASIC issued a consultation paper in February about how it will supervise trading after the government's decision last year to take the job off the ASX (the August decision paved the way for yesterday's one, and
Chi-X will not get final approval until the supervisory transfer is complete).
But the rule framework that ASIC discusses in the paper is modelled on the rules applied by the ASX and reflects the monopoly status quo. The proposed rules ''do not anticipate competition for market services'', ASIC says. ''New rules will be developed and consulted on if competition is to occur.''
So there's quite a bit of work to be done before Chi-X arrives. The government needs to amend the law to allow competition and Chi-X needs to firm up its operational plan, producing settlement and clearing procedures, for example.
ASX is Chi-X's preferred contractor for that task, but ASX has resisted Chi-X's argument that it will bring big volume gains and should get volume discounts. The Financial Services Minister, Chris Bowen, warned the government could, if necessary, use the Trade Practices Act to force ASX to allow access.
ASIC must implement the status quo rules it has announced and develop new rules for a multi-market environment to meet a July target for its assumption of the supervisory role, and, through that, Chi-X's target of a start-up early in the fourth quarter of this year.
Whether that timeline allows ASIC to develop a broader position on regulating multi-markets is one thing to watch.
The US Securities and Exchange Commission (SEC) announced in January it was seeking comment on the operation of multiple markets.
Competition has driven trading costs down and volumes up, deepening market liquidity. But the markets that have been opened up to competition now feature liquidity silos rather than a single liquidity pool, and the new platforms have fostered the development of automated trading strategies that many observers believe have the power to undermine open markets, particularly for retail investors.
Chi-X is going to operate an open market here. Its platform will not be hosting hidden, off-market trading. But the arrival of competitors marks the spot for a more general call by the government and ASIC about how the growth of multiple markets is going to be handled.
An ASIC spokesperson said the regulator was still aiming to take over market supervision by the third quarter and would look at overseas markets where competing platforms are operating to assess whether the status quo adequately deals with multiple exchanges.
ASIC is going to have to examine the same issues that the SEC is exploring. It wouldn't hurt if it duplicated the SEC's inquiries here, and if that takes more time the process should be extended: this is an historic change in the way the markets operate in this country, and we need to get the settings right from day one.
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